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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
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(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the period ended June 28, 2003
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission File Number: 0-27078
HENRY SCHEIN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-3136595
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
135 DURYEA ROAD
MELVILLE, NEW YORK
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
11747
(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 843-5500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
-- --
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes X No
-- --
As of August 05, 2003 there were 43,473,339 shares of the registrant's common
stock outstanding.
HENRY SCHEIN, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Balance Sheets as of June 28, 2003 and December 28, 2002 ........ 3
Statements of Income and Comprehensive Income for the three and
six months ended June 28, 2003 and June 29, 2002 .............. 4
Statements of Cash Flows for the six months ended
June 28, 2003 and June 29, 2002 ............................... 5
Notes to Consolidated Financial Statements ...................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................... 12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ........ 22
ITEM 4. Controls and Procedures ........................................... 22
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ................................................. 23
ITEM 4. Submission of Matters to a Vote of Security Holders ............... 25
ITEM 6. Exhibits and Reports on Form 8-K .................................. 26
Signature ......................................................... 26
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 28, December 28,
2003 2002
------------ ------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 121,161 $ 200,651
Marketable securities .................................................... 16,151 31,209
Accounts receivable, less reserves of $40,789 and $36,200, respectively .. 418,470 368,263
Inventories .............................................................. 343,745 323,080
Deferred income taxes .................................................... 27,936 29,919
Prepaid expenses and other ............................................... 73,216 74,407
----------- -----------
Total current assets ................................................... 1,000,679 1,027,529
Property and equipment, net of accumulated depreciation and amortization
of $114,098 and $101,519, respectively ................................... 150,437 142,532
Goodwill ..................................................................... 353,746 302,687
Other intangibles, net of accumulated amortization
of $6,537 and $4,151, respectively ....................................... 23,748 7,661
Investments and other ........................................................ 85,186 77,643
----------- -----------
$ 1,613,796 $ 1,558,052
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 228,467 $ 243,166
Bank credit lines .......................................................... 4,764 4,790
Accruals:
Salaries and related expenses ............................................ 54,949 53,954
Merger, integration, and restructuring costs ............................. 2,568 3,044
Acquisition earnout payments ............................................. -- 1,460
Taxes and other expenses ................................................. 128,233 114,254
Current maturities of long-term debt ....................................... 4,816 2,662
----------- -----------
Total current liabilities ................................................ 423,797 423,330
Long-term debt ............................................................... 247,179 242,561
Other liabilities ............................................................ 26,339 24,196
----------- -----------
Total liabilities ........................................................ 697,315 690,087
----------- -----------
Minority interest ............................................................ 9,466 6,748
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value, authorized 1,000,000,
issued and outstanding: 0 and 0, respectively ............................ -- --
Common stock, $.01 par value, authorized 120,000,000,
issued: 43,470,989 and 44,041,591, respectively .......................... 435 440
Additional paid-in capital ................................................. 431,117 436,554
Retained earnings .......................................................... 463,519 430,389
Treasury stock, at cost, 0 and 62,479 shares, respectively ................. -- (1,156)
Accumulated comprehensive income (loss) .................................... 12,098 (4,794)
Deferred compensation ...................................................... (154) (216)
----------- -----------
Total stockholders' equity ............................................... 907,015 861,217
----------- -----------
$ 1,613,796 $ 1,558,052
=========== ===========
See accompanying notes to consolidated financial statements.
3
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
----------------------------- ----------------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales ............................................. $ 776,166 $ 671,432 $ 1,514,163 $ 1,318,525
Cost of sales ......................................... 555,637 479,036 1,092,217 947,739
----------- ----------- ----------- -----------
Gross profit ........................................ 220,529 192,396 421,946 370,786
Operating expenses:
Selling, general and administrative ................. 164,499 145,407 323,711 288,599
----------- ----------- ----------- -----------
Operating income .................................. 56,030 46,989 98,235 82,187
Other income (expense):
Interest income ..................................... 1,921 2,481 4,313 4,920
Interest expense .................................... (4,595) (4,367) (9,328) (9,195)
Other - net ......................................... 242 706 927 140
----------- ----------- ----------- -----------
Income before taxes on income, minority interest
and equity in earnings of affiliates ............ 53,598 45,809 94,147 78,052
Taxes on income ....................................... 20,207 16,996 35,413 29,060
Minority interest in net income of subsidiaries ....... 874 932 1,611 1,501
Equity in earnings of affiliates ...................... 338 185 498 305
----------- ----------- ----------- -----------
Net income ............................................ $ 32,855 $ 28,066 $ 57,621 $ 47,796
=========== =========== =========== ===========
Comprehensive income:
Net income .......................................... $ 32,855 $ 28,066 $ 57,621 $ 47,796
Foreign currency translation adjustments .......... 12,528 14,699 16,867 13,382
Other ............................................. 167 118 25 57
----------- ----------- ----------- -----------
Comprehensive income .................................. $ 45,550 $ 42,883 $ 74,513 $ 61,235
=========== =========== =========== ===========
Net income per common share:
Basic ............................................. $ 0.76 $ 0.65 $ 1.32 $ 1.11
=========== =========== =========== ===========
Diluted ........................................... $ 0.74 $ 0.63 $ 1.29 $ 1.07
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic ............................................. 43,500 43,389 43,754 43,090
=========== =========== =========== ===========
Diluted ........................................... 44,549 44,747 44,780 44,559
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
----------------------
June 28, June 29,
2003 2002
--------- ---------
Cash flows from operating activities:
Net income ....................................................... $ 57,621 $ 47,796
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................ 17,115 13,009
Provision for losses and allowances on trade receivables ..... 4,490 1,219
Provision (benefit) for deferred income taxes ................ 3,893 (293)
Undistributed earnings of affiliates ......................... (498) (305)
Minority interest in net income of subsidiaries .............. 1,611 1,501
Other ........................................................ (246) (123)
Changes in operating assets and liabilities (net of acquisitions):
(Increase) decrease in accounts receivable ...................... (34,248) 4,071
Decrease (increase) in inventories ............................. 4,481 (17,760)
Decrease (increase) in other current assets .................... 12,527 (4,707)
Decrease in accounts payable and accruals ...................... (25,715) (31,027)
--------- ---------
Net cash provided by operating activities .......................... 41,031 13,381
--------- ---------
Cash flows from investing activities:
Capital expenditures ............................................. (21,321) (28,120)
Business acquisitions, net of cash acquired ...................... (66,754) (34,887)
Purchase of marketable securities with
maturities of more than three months ........................... (21,195) (20,639)
Maturities of marketable securities with
maturities of more than three months ........................... 28,530 --
Other ............................................................ 1,861 (574)
--------- ---------
Net cash used in investing activities .............................. (78,879) (84,220)
--------- ---------
Cash flows from financing activities:
Principal payments on long-term debt ............................. (4,954) (13,604)
Proceeds from issuance of stock upon exercise of stock
options by employees ........................................... 11,329 26,490
Payments for repurchases of common stock ......................... (46,152) --
Net payments on borrowings from banks ............................ (940) (435)
Other ............................................................ (93) (426)
--------- ---------
Net cash (used in) provided by financing activities ................ (40,810) 12,025
--------- ---------
Net decrease in cash and cash equivalents .......................... (78,658) (58,814)
Effect of exchange rate changes on cash and cash equivalents ....... (832) (2,045)
Cash and cash equivalents, beginning of period ..................... 200,651 193,367
--------- ---------
Cash and cash equivalents, end of period ........................... $ 121,161 $ 132,508
========= =========
See accompanying notes to consolidated financial statements.
5
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT EMPLOYEE AND SHARE DATA)
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Henry Schein,
Inc. and its wholly-owned and majority-owned subsidiaries (collectively, the
"Company").
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the information set
forth therein. These consolidated financial statements are condensed and
therefore do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. The consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and
supplementary data included in the Company's Annual Report on Form 10-K for the
year ended December 28, 2002. The Company follows the same accounting policies
in preparation of interim financial statements.
The results of operations and cash flows for the six months ended June 28,
2003 are not necessarily indicative of the results to be expected for the fiscal
year ending December 27, 2003 or any other period.
Certain amounts from prior periods have been reclassified to conform to the
current period presentation.
NOTE 2. SEGMENT DATA
The Company has two reportable segments: healthcare distribution and
technology.
The healthcare distribution segment, which is comprised of the Company's
dental, medical, and international business groups, distributes healthcare
products (primarily consumable) and services to office-based healthcare
practitioners and professionals in the combined United States, Canada, and
international markets. Products, which are similar for each business group, are
maintained and distributed from strategically located distribution centers.
The technology segment consists primarily of the Company's practice
management software business and certain other value-added products and services
that are distributed primarily to healthcare professionals in the United States
and Canada.
The Company's reportable segments are strategic business units that offer
different products and services to the same customer base. Most of the
technology business was acquired as a unit, and the management at the time of
acquisition was retained.
6
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT EMPLOYEE AND SHARE DATA)
(unaudited)
The following tables present information about the Company's business
segments:
Three Months Ended Six Months Ended
----------------------- -----------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net Sales:
Healthcare distribution (1):
Dental (2) ........................ $ 331,953 $ 306,287 $ 645,909 $ 601,568
Medical (3) ....................... 284,305 242,683 561,445 474,105
International (4) ................. 141,170 106,779 270,770 212,617
---------- ---------- ---------- ----------
Total healthcare distribution ... 757,428 655,749 1,478,124 1,288,290
Technology (5) ...................... 18,738 15,683 36,039 30,235
---------- ---------- ---------- ----------
$ 776,166 $ 671,432 $1,514,163 $1,318,525
========== ========== ========== ==========
- ----------
(1) Consists of consumable products, small equipment, laboratory products,
large dental equipment, branded and generic pharmaceuticals, surgical
products, diagnostic tests, infection control products and vitamins.
(2) Consists of products sold in the United States and Canada.
(3) Consists of products sold to the United States Medical and Veterinary
markets.
(4) Consists of products sold to the Dental, Medical and Veterinary markets,
primarily in Europe.
(5) Consists of practice management software and other value-added products and
services, which are distributed primarily to healthcare professionals in
the United States and Canada.
Three Months Ended Six Months Ended
----------------------- --------------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
---------- ---------- ------------ ------------
Operating Income:
Healthcare distribution ............. $ 48,259 $ 40,237 $ 83,422 $ 70,093
Technology .......................... 7,771 6,752 14,813 12,094
---------- ---------- ------------ ------------
Total ............................. $ 56,030 $ 46,989 $ 98,235 $ 82,187
========== ========== ============ ============
June 28, June 29,
2003 2002
------------ ------------
Total Assets:
Healthcare distribution ..................................... $ 1,591,157 $ 1,385,447
Technology .................................................. 123,555 101,160
----------- -----------
Total assets for reportable segments ...................... 1,714,712 1,486,607
Receivables due from healthcare distribution segment ........ (99,851) (74,880)
Receivables due from technology segment ..................... (1,065) (1,570)
----------- -----------
Consolidated total assets ................................. $ 1,613,796 $ 1,410,157
=========== ===========
7
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT EMPLOYEE AND SHARE DATA)
(unaudited)
NOTE 3. STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25), and related interpretations in
accounting for its employee stock options. Under APB 25, no compensation expense
is recorded as long as the exercise price is equal to or greater than the quoted
market price of the stock at the date of the grant.
Pro forma information regarding net income and earnings per share has been
determined as if the Company and its acquired subsidiaries had accounted for
their employee stock options under the fair value method of Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock-Based Compensation"
(FAS 123).
The weighted average fair value of options granted during the three months
ended June 28, 2003 and June 29, 2002 was $24.21 and $29.24, respectively. The
weighted average fair value of options granted during the six months ended June
28, 2003 and June 29, 2002 was $21.16 and $25.03, respectively. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for the
three and six months ended June 28, 2003 and June 29, 2002: risk-free interest
rates of 3.8% and 5.1%, respectively; volatility factor of the expected market
price of the Company's Common Stock of 43.7% and 49.6%, respectively, assumed
dividend yield of 0%, and a weighted-average expected life of the option of 10
years.
Under the accounting provisions of FAS 123, the Company's net income and
net income per common share would have been adjusted to the pro forma amounts
indicated below:
Three Months Ended Six Months Ended
------------------------ ------------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income as reported ................... $ 32,855 $ 28,066 $ 57,621 $ 47,796
Deduct: Stock-based employee
compensation expense determined under
fair value method, net of related taxes .. (3,255) (2,284) (5,753) (4,568)
---------- ---------- ---------- ----------
Pro forma net income ..................... $ 29,600 $ 25,782 $ 51,868 $ 43,228
========== ========== ========== ==========
Net income per common share - as reported:
Basic .................................... $ 0.76 $ 0.65 $ 1.32 $ 1.11
========== ========== ========== ==========
Diluted .................................. $ 0.74 $ 0.63 $ 1.29 $ 1.07
========== ========== ========== ==========
Net income per common share - pro forma:
Basic .................................... $ 0.68 $ 0.59 $ 1.19 $ 1.00
========== ========== ========== ==========
Diluted .................................. $ 0.66 $ 0.58 $ 1.16 $ 0.97
========== ========== ========== ==========
8
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT EMPLOYEE AND SHARE DATA)
(unaudited)
Note 4. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the six months ended
June 28, 2003 were as follows:
Healthcare
Distribution Technology Total
------------ ---------- --------
Balance as of December 28, 2002 ................ $302,352 $ 335 $302,687
Adjustments to goodwill:
Acquisition costs incurred during the six
months ended June 28, 2003 ............ 44,448 89 44,537
Foreign currency translation .............. 6,522 -- 6,522
-------- -------- --------
Balance as of June 28, 2003 .................... $353,322 $ 424 $353,746
======== ======== ========
The acquisition costs incurred during the six months ended June 28, 2003
primarily related to the acquisitions of Hager Dental GmbH (Hager) and Colonial
Surgical Supply, Inc. (Colonial), and the purchase of additional equity
interests in two subsidiaries.
Other intangible assets as of June 28, 2003 and December 28, 2002 were as
follows:
June 28, 2003 December 28, 2002 (1)
---------------------- ----------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
------- ------------ ------- ------------
Other intangible assets:
Non-compete agreements ........ $15,176 $(4,375) $10,826 $(3,549)
Trademarks and trade names .... 7,969 (29) 89 (18)
Customer relationships ........ 4,071 -- -- --
Other ......................... 3,069 (2,133) 897 (584)
------- ------- ------- -------
Total ............................ $30,285 $(6,537) $11,812 $(4,151)
======= ======= ======= =======
- ----------
(1) Reclassified to conform to current period presentation.
Amortization of other intangible assets for the six months ended June 28,
2003 and June 29, 2002 was approximately $865 and $563, respectively. The annual
amortization expense expected for the years 2003 through 2007 is $2,482, $2,607,
$1,617, $1,185, and $1,035, respectively.
9
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT EMPLOYEE AND SHARE DATA)
(unaudited)
NOTE 5. CONTINUING OBLIGATIONS
In connection with acquisitions made in prior years and the Company's plan
of restructuring announced on August 1, 2000, the Company incurred certain
merger and integration and restructuring costs.
The following table shows amounts paid against the accruals for these costs
during the six months ended June 28, 2003:
Balance at Balance at
December 28, June 28,
2002 Payments 2003
----------- -------- ----------
Facility closing costs (1) ...................... $ 2,150 $ (282) $ 1,868
Severance and other direct costs (2) ............ 558 (147) 411
Direct transaction, professional and
consulting fees and other integration costs ... 336 (47) 289
------- ------- -------
$ 3,044 $ (476) $ 2,568
======= ======= =======
- ----------
(1) Represents costs associated with the closing of certain equipment branches
(primarily lease termination costs) and property and equipment write-offs.
(2) Represents salaries and related benefits for employees separated from the
Company. For the six months ended June 28, 2003, two employees received
severance payments and were still owed severance pay and benefits at June
28, 2003.
10
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT EMPLOYEE AND SHARE DATA)
(unaudited)
NOTE 6. BUSINESS ACQUISITIONS
During the six months ended June 28, 2003, the Company acquired two
healthcare businesses and purchased additional equity interests in two
subsidiaries. On May 28, 2003, the Company acquired all of the outstanding
common stock of Hager Dental GmbH, a dental distributor of consumable supplies
and equipment located in Germany. On June 2, 2003, the Company acquired the
assets of Colonial Surgical Supply, Inc., a United States dental distributor of
consumable supplies, primarily examination gloves. None of these transactions
were considered material on an individual or aggregate basis. The transactions
were accounted for under the purchase method of accounting and have been
included in the consolidated financial statements from their respective
acquisition dates.
Hager reported 2002 net sales of approximately $50,000. Colonial reported
2002 net sales of more than $40,000.
The Company recorded goodwill of approximately $17,600 and $13,700, and
other intangibles of approximately $1,100 and $12,400 in conjunction with the
Hager and Colonial acquisitions, respectively. The acquisition agreement for
Colonial requires the Company to pay additional cash consideration of up to
$10,000, if certain profitability targets are met.
NOTE 7. EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and diluted earnings
per common share follows:
Three Months Ended Six Months Ended
------------------------- -------------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Basic ............................. 43,500,099 43,388,518 43,754,062 43,089,815
Effect of assumed conversion of
employee stock options .......... 1,048,483 1,358,275 1,025,911 1,468,753
---------- ---------- ---------- ----------
Diluted ........................... 44,548,582 44,746,793 44,779,973 44,558,568
========== ========== ========== ==========
Options to purchase approximately 37,319 and 6,440 shares of common stock
at prices ranging from $48.25 to $54.00 and $48.25 to $49.85 per share that were
outstanding during the three months ended June 28, 2003 and June 29, 2002,
respectively, were excluded from the computation of diluted earnings per common
share. Options to purchase approximately 74,294 and 15,558 shares of common
stock at prices ranging from $44.90 to $54.00 and $45.96 to $49.85 per share
that were outstanding during the six months ended June 28, 2003 and June 29,
2002, respectively, were excluded from the computation of diluted earnings per
common share. In each of the respective periods, the options' exercise prices
exceeded the fair market value of the Company's common stock.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, the statements in this
report (including without limitation, statements indicating that we "expect",
"estimate", "anticipate", or "believe", and all other statements concerning
future financial results, product or service offerings or other events that have
not yet occurred) are forward-looking statements that are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995,
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. Forward-looking statements involve
known and unknown factors, risks and uncertainties which may cause our actual
results in future periods to differ materially from those expressed in any
forward-looking statements. Those factors, risks and uncertainties include, but
are not limited to, the factors described under "Risk Factors" below.
OVERVIEW
We are the largest distributor of healthcare products and services to
office-based healthcare practitioners in the combined North American and
European markets with operations in the United States, Canada, the United
Kingdom, the Netherlands, Belgium, Germany, France, Austria, Spain, Ireland,
Portugal, Australia and New Zealand.
We sell products and services to over 400,000 customers, primarily dental
practices and dental laboratories, as well as physician practices, veterinary
clinics and institutions. Through our comprehensive catalogs and other direct
sales and marketing programs, we offer customers a broad product selection of
both branded and private brand products.
We conduct our business through two segments: healthcare distribution and
technology. These operations offer different products and services to the same
customer base.
The healthcare distribution segment consists of our dental, medical
(including veterinary), and international groups. The international group is
comprised of our healthcare distribution business units located primarily in
Europe, and offers products and services to dental and medical (including
veterinary) customers located in their respective geographic regions.
The technology segment consists of our practice management software
business and certain other value-added products and services which are
distributed primarily to healthcare professionals in the United States and
Canada.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Securities Exchange Commission Financial Reporting Release No. 60 requires
all companies to include a discussion of critical accounting policies or methods
used in the preparation of financial statements.
12
We believe that the following critical accounting policies affect the
significant judgments and estimates used in the preparation of our financial
statements:
Management's Estimates
The preparation of consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate estimates, including those related
to sales allowance provisions, as described below, volume purchase rebates,
income taxes, inventory and bad debt reserves, and contingencies. We base our
estimates on historical data, when available, experience, industry and market
trends, and on various other assumptions that are believed to be reasonable
under the circumstances, the combined results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates.
Revenue Recognition
Sales are recorded when products are shipped or services are rendered to
customers, as we generally have no significant post delivery obligations, the
product price is fixed and determinable, collection of the resulting receivable
is probable and product returns are reasonably estimable. Revenues derived from
post contract customer support for practice management software are deferred and
recognized ratably over the period in which the support is to be provided,
generally one year. Revenues from freight charged to customers are recognized
when products are shipped. Provisions for discounts, rebates to customers,
customer returns and other adjustments are provided for in the period the
related sales are recorded based upon historical data.
Accounts Receivable and Credit Policies
The carrying amount of accounts receivable is reduced by a valuation
allowance that reflects our best estimate of the amounts that will not be
collected. In addition to reviewing delinquent accounts receivable, we consider
many factors in estimating our general allowance, including historical data,
experience, customer types, credit worthiness, and economic trends. From time to
time, we may adjust our assumptions for anticipated changes in any of those or
other factors expected to affect collectability.
Allowances for accounts receivable, comprised primarily of the allowance
for doubtful accounts and the allowance for sales returns, were $40.8 million
and $36.2 million at June 28, 2003 and December 28, 2002, respectively.
Long-Lived Assets
Long-lived assets, other than goodwill, are evaluated for impairment when
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through the estimated undiscounted future cash
flows from the use of these assets. When any such impairment exists, the related
assets are written down to fair value.
Other intangible assets are amortized over their estimated useful lives. We
13
have reassessed the estimated useful lives of our intangible assets, which
primarily consist of non-compete agreements, trademarks and trade names, and
customer relationships, and no changes were deemed necessary.
Goodwill
In accordance with Statements of Financial Accounting Standards No. 141,
"Business Combinations" (FAS 141), and No. 142, "Goodwill and Other Intangible
Assets" (FAS 142), goodwill and intangible assets deemed to have indefinite
lives are no longer amortized but are subject to annual impairment tests.
At June 28, 2003, we had recorded approximately $377.5 million in goodwill
and other intangible assets, net of accumulated amortization, primarily related
to acquisitions made in current as well as prior years. The goodwill is
substantially related to our healthcare distribution segment.
We estimated the fair value of our reporting units in accordance with the
new standard and compared these valuations with the respective book values for
each of the reporting units to determine whether any goodwill impairment
existed. In determining the fair value, we consider past, present and future
expectations of performance. We completed our annual test as of the first day of
the fourth quarter of 2002 and determined that there was no impairment of
goodwill.
As required by FAS 142, we complete goodwill impairment tests at least
annually. On a quarterly basis, we review changes in market conditions, among
other factors, that could have a material impact on our estimates of fair value
in order to reassess the carrying value of our goodwill. As of June 28, 2003, no
charges were deemed necessary.
Stock-Based Compensation
We account for stock option awards to employees under the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". Under this method,
no compensation expense is recorded as long as the exercise price is equal to or
greater than the quoted market price of the stock at the date of grant.
We make pro forma disclosures of net income and earnings per share as if
the fair value-based method of accounting (the alternative method of accounting
for stock-based compensation) had been applied as required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123).
Had we elected to use FAS 123 to account for stock-based compensation under
the fair value method, we would have been required to record compensation
expense, and as a result, diluted earnings per common share for the six months
ended June 28, 2003 and June 29, 2002 would have been lower by $0.13 and $0.10,
respectively.
14
THREE MONTHS ENDED JUNE 28, 2003 COMPARED TO THREE MONTHS ENDED JUNE 29, 2002
For the three months ended June 28, 2003, our net sales increased $104.8
million, or 15.6%, to $776.2 million, from $671.4 million for the three months
ended June 29, 2002.
Of the $104.8 million increase in net sales, approximately $101.7 million,
or 97.0%, represented a 15.5% increase in our healthcare distribution business.
As part of this increase, approximately $41.6 million represented a 17.2%
increase in our medical business, $34.4 million represented a 32.2% increase in
our international business, and $25.7 million represented an 8.4% increase in
our dental business. The increase in medical net sales was primarily
attributable to increased sales to physicians' office and alternate care
markets. In the international market, the increase in net sales was primarily
due to favorable exchange rates to the U.S. dollar, an acquisition, and
increased account penetration in France and Spain. Excluding the impact of the
exchange rates and the acquisition, net sales for the international market
increased by 5.9%. In the dental market, the increase in net sales was primarily
due to increased dental equipment sales and services, an acquisition, and
increased account penetration to existing customers driven primarily by our
Privileges loyalty program. Net sales of dental consumable merchandise increased
by 6.0%, while net sales of dental equipment increased by 18.9%.
The remaining increase in second quarter 2003 net sales was due to our
technology business, which increased $3.1 million, or 19.5%. The increase in
technology and value-added product net sales was primarily due to increased
sales of software products and related services. As part of a new marketing
initiative, MarketOne, certain technology and equipment products were sold
directly to end-user customers beginning with the third quarter of 2002, rather
than through resellers, which resulted in increased net sales for the technology
business. Had MarketOne been in effect for the three months ended June 29, 2002,
we estimate that the increase in our technology business net sales for the three
months ended June 28, 2003 would have been 11.0%.
Gross profit increased by $28.1 million, or 14.6%, to $220.5 million for
the three months ended June 28, 2003, from $192.4 million for the three months
ended June 29, 2002. Gross profit margin decreased by 0.3% to 28.4%, from 28.7%
for the same period last year.
Healthcare distribution gross profit increased $25.4 million, or 14.1%, to
$205.9 million for the three months ended June 28, 2003, from $180.5 million for
the three months ended June 29, 2002. Healthcare distribution gross profit
margin decreased by 0.3% to 27.2% for the three months ended June 28, 2003, from
27.5% for the three months ended June 29, 2002, primarily due to changes in
sales mix in our medical business.
Technology gross profit increased by $2.7 million, or 22.7%, to $14.6
million for the three months ended June 28, 2003, from $11.9 million for the
three months ended June 29, 2002. Technology gross profit margins increased by
2.1% to 77.7% for the three months ended June 28, 2003, from 75.6% for the three
months ended June 29, 2002.
Selling, general and administrative expenses increased by $19.1 million, or
13.1%, to $164.5 million for the three months ended June 28, 2003, from $145.4
million for the three months ended June 29, 2002.
Selling and shipping expenses increased by $12.7 million, or 14.0%, to
15
$103.3 million for the three months ended June 28, 2003, from $90.6 million for
the three months ended June 29, 2002. As a percentage of net sales, selling and
shipping expenses decreased 0.2% to 13.3% for the three months ended June 28,
2003, from 13.5% for the three months ended June 29, 2002.
General and administrative expenses increased $6.4 million, or 11.7%, to
$61.2 million for the three months ended June 28, 2003, from $54.8 million for
the three months ended June 29, 2002. As a percentage of net sales, general and
administrative expenses decreased 0.3% to 7.9% for the three months ended June
28, 2003, from 8.2% for the three months ended June 29, 2002. The decrease was
primarily attributable to leveraging of our infrastructure with increased sales
volume.
Other income (expense) - net increased by $(1.2) million to $(2.4) million
for the three months ended June 28, 2003, from $(1.2) million for the three
months ended June 29, 2002. The net increase was due primarily to lower interest
income, lower foreign currency gains, and higher interest expense.
Equity in earnings of affiliates increased by $0.1 million, to $0.3 million
for the three months ended June 28, 2003, from $0.2 million for the three months
ended June 29, 2002.
For the three months ended June 28, 2003, our effective tax rate was 37.7%.
For the three months ended June 29, 2002, our effective tax rate was 37.1%. The
difference between our effective tax rates and the Federal statutory rates for
both periods relate primarily to state income taxes.
SIX MONTHS ENDED JUNE 28, 2003 COMPARED TO SIX MONTHS ENDED JUNE 29, 2002
For the six months ended June 28, 2003, our net sales increased $195.7
million, or 14.8%, to $1,514.2 million, from $1,318.5 million for the six months
ended June 29, 2002.
Of the $195.7 million increase in net sales, approximately $189.9 million,
or 97.0%, represented a 14.7% increase in our healthcare distribution business.
As part of this increase, approximately $87.4 million represented an 18.4%
increase in our medical business, $58.2 million represented a 27.4% increase in
our international business, and $44.3 million represented a 7.4% increase in our
dental business. The increase in medical net sales was primarily attributable to
increased sales to physicians' office and alternate care markets. In the
international market, the increase in net sales was primarily due to favorable
exchange rates to the U.S. dollar, increased account penetration in France,
Spain, and Australia, and the acquisition of Hager Dental GmbH in the second
quarter of 2003. Excluding the impact of the exchange rates and the acquisition,
net sales for the international market increased by 4.7%. In the dental market,
the increase in net sales was primarily due to increased dental equipment sales
and services, the acquisition of Colonial Surgical Supply, Inc., and increased
account penetration to existing customers driven primarily by our Privileges
loyalty program. Net sales of dental consumable merchandise increased by 5.4%,
while net sales of dental equipment increased by 16.1%.
The remaining increase in net sales for the six months ended June 28, 2003
was due to our technology business, which increased $5.8 million, or 19.2%. The
increase in technology and value-added product net sales was primarily due to
increased sales of software products and related services. As part of a new
marketing initiative, MarketOne, certain technology and equipment products were
sold directly to end-user customers beginning with the third quarter of 2002,
16
rather than through resellers, which resulted in increased net sales for the
technology business. Had MarketOne been in effect for the six months ended June
29, 2002, we estimate that the increase in our technology business net sales for
the six months ended June 28, 2003 would have been 11.7%.
Gross profit increased by $51.1 million, or 13.8%, to $421.9 million for
the six months ended June 28, 2003, from $370.8 million for the six months ended
June 29, 2002. Gross profit margin decreased by 0.2% to 27.9%, from 28.1% for
the same period last year.
Healthcare distribution gross profit increased $46.0 million, or 13.2%, to
$394.0 million for the six months ended June 28, 2003, from $348.0 million for
the six months ended June 29, 2002. Healthcare distribution gross profit margin
decreased by 0.3% to 26.7% for the six months ended June 28, 2003, from 27.0%
for the six months ended June 29, 2002, primarily due to changes in sales mix in
our medical business.
Technology gross profit increased by $5.1 million, or 22.4%, to $27.9
million for the six months ended June 28, 2003, from $22.8 million for the six
months ended June 29, 2002. Technology gross profit margins increased by 2.0% to
77.4% for the six months ended June 28, 2003, from 75.4% for the six months
ended June 29, 2002.
Selling, general and administrative expenses increased by $35.1 million, or
12.2%, to $323.7 million for the six months ended June 28, 2003, from $288.6
million for the six months ended June 29, 2002.
Selling and shipping expenses increased by $23.8 million, or 13.3%, to
$202.5 million for the six months ended June 28, 2003, from $178.7 million for
the six months ended June 29, 2002. As a percentage of net sales, selling and
shipping expenses decreased 0.2% to 13.4% for the six months ended June 28,
2003, from 13.6% for the six months ended June 29, 2002.
General and administrative expenses increased $11.3 million, or 10.3%, to
$121.2 million for the six months ended June 28, 2003, from $109.9 million for
the six months ended June 29, 2002. As a percentage of net sales, general and
administrative expenses decreased 0.3% to 8.0% for the six months ended June 28,
2003, from 8.3% for the six months ended June 29, 2002. The decrease was
primarily attributable to leveraging of our infrastructure with increased sales
volume.
Other income (expense) - net was substantially unchanged from the prior
period.
Equity in earnings of affiliates increased by $0.2 million, to $0.5 million
for the six months ended June 28, 2003, from $0.3 million for the six months
ended June 29, 2002.
For the six months ended June 28, 2003, our effective tax rate was 37.6%.
For the six months ended June 29, 2002, our effective tax rate was 37.2%. The
difference between our effective tax rates and the Federal statutory rates for
both periods relate primarily to state income taxes.
17
SEASONALITY
Our business is subject to seasonal and other quarterly influences. Net
sales and operating profits are generally higher in the fourth quarter due to
timing of sales of software and equipment, year end promotions and purchasing
patterns of office-based healthcare practitioners and are generally lower in the
first quarter due primarily to the increased purchases in the prior quarter.
Quarterly results also may be materially affected by a variety of other
factors, including the timing of acquisitions and related costs, timing of
purchases and/or sales, special promotional campaigns, seasonal products,
fluctuations in exchange rates associated with international operations and
adverse weather conditions.
E-COMMERCE
Traditional healthcare supply and distribution relationships are being
impacted by electronic on-line commerce solutions. Our distribution business is
characterized by rapid technological developments and is highly competitive. The
rapid evolution of on-line commerce will require us to provide continuous
improvement in performance, features and reliability of Internet content and
technology, particularly in response to competitive offerings.
Through our proprietary technologically-based suite of products, we offer
customers a variety of competitive alternatives. We believe that our tradition
of reliable service coupled with our name recognition and large customer base
built on solid customer relationships makes us well situated to participate in
this growing aspect of the distribution business. We are exploring ways and
means of improving and expanding our Internet presence and will continue to do
so.
INFLATION
Management does not believe inflation had a material effect on the
financial statements for the periods presented.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements have been to fund (a) acquisitions, (b)
repurchases of common stock, (c) working capital needs resulting from increased
sales and special inventory forward buy-in opportunities, and (d) capital
expenditures. Since sales tend to be strongest during the fourth quarter and
special inventory forward buy-in opportunities are most prevalent just before
the end of the year, our working capital requirements have generally been higher
from the end of the third quarter to the end of the first quarter of the
following year. We have financed our business primarily through operations, our
revolving credit facilities, private placement loans and stock issuances.
Net cash provided by operating activities for the six months ended June 28,
2003 of $41.0 million resulted primarily from net income of $57.6 million and
non-cash expenses of approximately $26.4 million, offset by a net increase in
the use of working capital of approximately $43.0 million. The increase in the
use of working capital was due to a $34.3 million increase in accounts
receivable combined with a decrease in accounts payable and accruals of $25.7
18
million, primarily due to payments made to vendors for year end inventory
buy-ins, offset by a $12.5 million decrease in other current assets and a $4.5
million decrease in inventories. For the six months ended June 28, 2003, the
increase in our accounts receivable was primarily due to increased sales volume.
Our accounts receivable days sales outstanding ratio improved to 46.9 days for
the six months ended June 28, 2003, from 50.0 days for the six months ended June
29, 2002, primarily due to continued focus in this area. Our inventory turns
improved to 6.5 turns for the six months ended June 28, 2003, from 6.3 turns for
the six months ended June 29, 2002. We anticipate future increases in our
working capital requirements as a result of continued sales growth and special
inventory forward buy-in opportunities.
Net cash used in investing activities for the six months ended June 28,
2003 of $78.9 million resulted primarily from business acquisitions of $66.8
million, capital expenditures of $21.3 million, and purchases of United States
government and government agency bonds, corporate bonds and commercial paper
with maturities of more than three months of $21.2 million, offset by maturities
of United States government and government agency bonds, municipal bonds and
corporate bonds of $28.5 million. Our investments in corporate bonds consist of
debt securities rated AAA by Moody's (or an equivalent rating) and investments
in commercial paper consist of debt securities rated P-1 by Moody's (or an
equivalent rating). The fair values of our investments are determined by quoted
market prices. We expect to invest more than $35.0 million during the year
ending December 27, 2003 in capital projects to modernize and expand our
facilities, to enhance our computer infrastructure systems and to integrate
operations.
Net cash used in financing activities for the six months ended June 28,
2003 of $40.8 million resulted primarily from our repurchases of common stock of
$46.2 million and debt repayments of $5.9 million, offset primarily by proceeds
from the issuance of stock upon exercise of stock options of $11.3 million. On
March 12, 2003, we announced that our Board of Directors had authorized the
repurchase of up to two million shares of our common stock, which represented
approximately 4.5% of shares outstanding on the announcement date. During the
six months ended June 28, 2003, we repurchased and retired 1,071,500 shares at
an average price of $43.07 per share.
Some holders of minority interests in entities we have acquired have the
right at certain times to require us to acquire their interest at a price that
approximates fair value pursuant to a formula based on earnings of the entity.
Additionally, some prior owners of acquired businesses are eligible to receive
additional purchase price cash consideration if certain profitability targets
are met.
Our cash and cash equivalents as of June 28, 2003 of $121.2 million consist
of bank balances and investments in money market funds. These investments have
staggered maturity dates, none of which exceed three months, and have a high
degree of liquidity since the securities are traded in public markets.
We have a revolving credit facility of $200.0 million that is a four year
committed line scheduled to terminate in May 2006. We also have one uncommitted
bank line of $15.0 million. There were no borrowings under either credit
facility at June 28, 2003. As of June 28, 2003, certain subsidiaries of ours had
revolving credit facilities with approximately $36.3 million available for
borrowing. At June 28, 2003, $4.8 million had been borrowed.
On June 30, 1999 and September 25, 1998, we completed private placement
19
transactions under which we issued $130.0 million and $100.0 million,
respectively, in Senior Notes. The $130.0 million notes come due on June 30,
2009 and bear interest at a rate of 6.94% per annum. Principal payments totaling
$20.0 million are due annually starting September 25, 2006 on the $100.0 million
notes and bear interest at a rate of 6.66% per annum. Interest on both notes is
payable semi-annually.
We believe that our cash and cash equivalents of $121.2 million, our
investment in short-term marketable securities of $16.2 million as of June 28,
2003, our ability to access public and private debt and equity markets, and the
availability of funds under our existing credit agreements will provide us with
sufficient liquidity to meet our currently foreseeable short-term and long-term
capital needs.
RISK FACTORS
Stockholders and investors should carefully consider the risks described
below and other information in this quarterly report. Our business, financial
condition and operating results, and the trading price of our common stock could
be adversely affected if any of these risks materialize.
o The healthcare products distribution industry is highly competitive, and we
compete with numerous companies, including major manufacturers and
distributors that have greater financial and other resources than us.
Competitors could obtain exclusive rights to market particular products or
manufacturers could increase their efforts to sell directly to end-users,
thereby bypassing distributors like us. Consolidation among healthcare
products distributors could result in existing competitors increasing their
market position. In addition, unavailability of products, whether due to
our inability to gain access to products or interruptions in supply of
products from manufacturers, could adversely affect our operating results.
o In recent years, the healthcare industry has undergone significant change
driven by various efforts to reduce costs, including the reduction of
spending budgets by government and private insurance programs, such as
Medicare, Medicaid and corporate health insurance plans; trends toward
managed care; consolidation of healthcare distribution companies;
electronic commerce; and collective purchasing arrangements among
office-based healthcare practitioners. If we are unable to react
effectively to these and other changes in the healthcare industry, our
operating results could be adversely affected.
o Our technology segment, which primarily sells practice management software
and other value-added products, depends upon continued product development,
technical support and marketing. Failures in these and related areas could
adversely affect our results of operations.
o Our business is subject to requirements under various local, state, Federal
and foreign governmental laws and regulations applicable to the manufacture
and distribution of pharmaceuticals and medical devices, including the
Federal Food, Drug, and Cosmetic Act, the Prescription Drug Marketing Act
of 1987 and the Controlled Substances Act. There is no assurance that
current or future government regulations will not adversely affect our
business.
o Our business involves a risk of product liability and other claims in the
ordinary course of business, and from time to time we are named as a
20
defendant in cases as a result of our distribution of pharmaceutical and
other healthcare products. We have insurance policies, including product
liability insurance, and in many cases we have indemnification rights from
manufacturers with respect to the products we distribute. There is no
assurance that insurance coverage or manufacturers' indemnity will be
available in all of the pending or any future cases brought against us, or
that an unfavorable result in any such case will not adversely affect our
financial condition or results of operations.
o Our business is dependent upon our ability to hire and retain qualified
sales representatives, service specialists and other sales agents. Due to
the relationships developed between our field sales representatives and
their customers, upon the departure of a sales representative we face the
risk of losing the representative's customers, especially if the
representative becomes an employee of one of our competitors.
o Our business has been subject to seasonal and other quarterly fluctuations.
Net sales and operating profits generally have been higher in the fourth
quarter due to purchasing patterns of office-based healthcare practitioners
and year end promotions. Net sales and operating profits generally have
been lower in the first quarter, primarily due to increased purchases in
the prior quarter.
o Our international operations are subject to inherent risks, which could
adversely affect our operating results. These risks include difficulties in
opening and managing foreign offices and distribution centers; difficulties
in establishing channels of distribution; fluctuations in the value of
foreign currencies; longer payment cycles of foreign customers and
difficulty of collecting receivables in foreign jurisdictions;
import/export duties and quotas; and unexpected regulatory, economic and
political changes in foreign markets.
o Our expansion through acquisitions and/or joint ventures could result in a
loss of customers, diversion of management attention and increased demands
on our operations, information systems and financial resources.
o We rely on third parties to ship products to our customers. Increases in
shipping rates or interruptions of service could adversely affect our
operating results.
o Changes in e-commerce could affect our business relationships and could
require significant resources. The development of on-line commerce,
including business-to-business exchanges, will require us to continuously
improve the performance, security, features and reliability of Internet
content and technology.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes to the disclosures made in our Annual Report
on Form 10-K for the year ended December 28, 2002, on this matter.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's principal
executive officer and principal financial officer, has carried out an evaluation
of the effectiveness of the Company's disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of
1934, as amended (the "Exchange Act")) as of the end of the period covered by
this report. Based on such evaluation, the Company's principal executive officer
and principal financial officer have concluded that, as of the end of such
period, the Company's disclosure controls and procedures were effective in
recording, processing, summarizing and reporting, on a timely basis, the
information required to be disclosed by the Company in this report.
Changes in Internal Controls
There have not been any changes in the Company's internal controls over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
the Company's internal controls over financial reporting.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Our business involves a risk of product liability claims and other claims
in the ordinary course of business, and from time to time we are named as a
defendant in cases as a result of our distribution of pharmaceutical and other
healthcare products.
As of June 28, 2003, we were named a defendant in approximately 46 product
liability cases. Of these claims, 42 involve claims made by healthcare workers
who claim allergic reaction relating to exposure to latex gloves. In each of
these cases, we acted as a distributor of both brand name and "Henry Schein"
private brand latex gloves, which were manufactured by third parties. To date,
discovery in these cases has generally been limited to product identification
issues. The manufacturers in these cases have withheld indemnification of the
Company pending product identification; however, we have impleaded or filed
cross claims against those manufacturers, subject to jurisdiction, in each case
in which we are a defendant.
On January 27, 1998, in District Court in Travis County, Texas, we and one
of our subsidiaries were named as defendants in a matter entitled "Shelly E.
Stromboe and Jeanne Taylor, on Behalf of Themselves and all others Similarly
Situated vs. Henry Schein, Inc., Easy Dental Systems, Inc. and Dentisoft, Inc.",
Case No. 98-00886. The Petition alleges, among other things, negligence, breach
of contract, fraud, and violations of certain Texas commercial statutes
involving the sale of certain practice management software products sold prior
to 1998 under the Easy Dental(R) name. In October 1999, the trial court, on
motion, certified both a Windows(R) sub-class and a DOS sub-class to proceed as
a class action pursuant to Tex. R. Civ. P. 42. It is estimated that 5,000
Windows(R) customers and 10,000 DOS customers were covered by the class action
that was certified by the trial court. In November of 1999, we filed an
interlocutory appeal of the trial court's determination to the Texas Court of
Appeals on the issue of whether this case was properly certified as a class
action. On September 14, 2000, the Court of Appeals affirmed the trial court's
certification order. On January 5, 2001, we filed a Petition for Review in the
Texas Supreme Court asking the Court to find that it had "conflicts
jurisdiction" to permit review of the trial court's certification order. The
Texas Supreme Court heard oral argument on February 6, 2002. On October 31,
2002, the Texas Supreme Court issued an opinion in the case holding that it had
conflicts jurisdiction to review the decision of the Court of Appeals and
finding that the trial court's certification of the case as a class action was
improper. The Supreme Court further held that the judgment of the court of
appeals, which affirmed the class certification order, must be reversed in its
entirety. Upon reversal of the class certification order, the Supreme Court
remanded the case to the trial court for further proceedings consistent with its
opinion. On January 31, 2003, counsel for the class filed a Motion for Rehearing
with the Texas Supreme Court seeking a reversal for the Supreme Court's earlier
opinion reversing the class certification order. On May 8, 2003, the Supreme
Court denied the Motion for Rehearing, letting stand its opinion dated October
31, 2002, which decertified both sub-classes in their entirety. While no papers
have been filed at this time, counsel for the class has indicated orally that
they intend to file an amended motion for class certification wherein they will
seek to have the trial court certify another class purportedly consistent with
the opinion of the Texas Supreme Court handed down on October 31, 2002. At this
time, however, it is not possible to determine whether the trial court will
certify a different class upon motion, if any, or the possible range of damages
or other relief sought by the plaintiffs in the trial court.
23
In February 2002, we were served with a summons and complaint in an action
commenced in the Superior Court of New Jersey, Law Division, Morris County,
entitled "West Morris Pediatrics, P.A. and Avenel-Iselin Medical Group, P.A. vs.
Henry Schein, Inc., doing business as Caligor", Case No. MRS-L-421-02. The
plaintiffs' complaint purports to be on behalf of a nationwide class, but there
has been no court determination that the case may proceed as a class action.
Plaintiffs seek to represent a class of all physicians, hospitals and other
healthcare providers throughout New Jersey and across the United States. This
complaint, as amended in August 2002, alleges, among other things, breach of
oral contract, breach of implied covenant of good faith and fair dealing,
violation of the New Jersey Consumer Fraud Act, unjust enrichment, conversion,
and promissory estoppel relating to sales of a vaccine product in the year 2001.
We filed an answer in October 2002. Because damages have not been specified by
the plaintiffs, it is not possible to determine the range of damages or other
relief sought by the plaintiffs. We intend to vigorously defend ourselves
against this claim, as well as all other claims, suits and complaints.
We have various insurance policies, including product liability insurance,
covering risks and in amounts we consider adequate. In many cases in which we
have been sued in connection with products manufactured by others, we are
provided indemnification by the manufacturer. There can be no assurance that the
coverage we maintain is sufficient or will be available in adequate amounts or
at a reasonable cost, or that indemnification agreements will provide adequate
protection for the Company. In the opinion of the Company, all pending matters
are covered by insurance or will not otherwise seriously harm the Company's
financial condition.
24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on June 18, 2003, the
stockholders of the Company took the following actions:
(i) Re-elected the following individuals to the Company's Board of Directors:
Stanley M. Bergman (37,407,835 shares voting for, 279,501 shares withheld)
Barry J. Alperin (37,373,102 shares voting for, 314,234 shares withheld)
Gerald A. Benjamin (37,403,680 shares voting for, 283,656 shares withheld)
James P. Breslawski (37,404,806 shares voting for, 282,530 shares withheld)
Pamela Joseph (37,351,899 shares voting for, 335,437 shares withheld)
Donald J. Kabat (37,367,735 shares voting for, 319,601 shares withheld)
Philip A. Laskawy (37,297,102 shares voting for, 390,234 shares withheld)
Norman S. Matthews (37,325,693 shares voting for, 361,643 shares withheld)
Mark E. Mlotek (37,405,369 shares voting for, 281,967 shares withheld)
Steven Paladino (37,404,156 shares voting for, 283,180 shares withheld)
Marvin H. Schein (36,966,974 shares voting for, 720,362 shares withheld)
Irving Shafran (37,413,225 shares voting for, 274,111 shares withheld)
Dr. Louis W. Sullivan (37,309,189 shares voting for, 378,147 shares withheld)
(ii) Approved the Company's Amended and Restated 1994 Stock Option Plan
(31,153,380 shares voting for; 6,392,891 shares voting against; 141,065
shares abstaining).
(iii) Approved the Company's Amended and Restated 1996 Non-Employee Director
Stock Option Plan (34,644,261 shares voting for; 2,907,115 shares voting
against; 135,960 shares abstaining).
(iv) Ratified the selection of BDO Seidman, LLP as the Company's independent
auditors for the year ending December 27, 2003 (36,207,591 shares voting
for; 1,371,393 shares voting against; 108,352 shares abstaining).
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Henry Schein, Inc. 1994 Stock Option Plan, as amended and restated
effective as of June 18, 2003.
10.2 Henry Schein, Inc. 1996 Non-Employee Director Stock Incentive Plan, as
amended and restated effective as of June 18, 2003.
10.3 Amendment No. 1 to Credit Agreement, dated as of May 1, 2003, among
the Company, the several Guarantors from time to time parties thereto,
JP Morgan Chase Bank, as administrative agent, issuing lender, sole
lead arranger, and sole book runner, Fleet National Bank, as
syndication agent, and the several lenders from time to time parties
thereto.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K.
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Henry Schein, Inc.
(Registrant)
By: /s/ Steven Paladino
------------------------------------
Steven Paladino
Executive Vice President,
Chief Financial Officer and Director
(principal financial officer and
accounting officer)
Dated: August 11, 2003
26